Notes on Financial Accounting (ACG2021) by User:Joel Vannatta Chapter 1
Different forms of businesses Sole Proprietorship: A business with a single owner. *Advantages #The owner maintains complete control of the company #The owner receives the full benefits of the company's profits *Disadvantages #The owner has full legal liability for covering the debts of the company; the owner's personal assets can be seized by debtors #There is limited investment capital and talent that may be required to make the company successful Partnership: A business with 2 or more owners, but is not publically traded. *Advantages #There is more investment potential than a sole proprietorship. #The owners may have different skills that will benefit the company. *Disadvantages #In order to leave the partnership, one partner must convince the other purchase his share, or find another investor to do so; it is more difficult than selling stocks. #One owner may be held liable for another's financial decisions; there is still full liability for the company's debts. #Control over the business is split between the different owners. Corporation: A business that is recognized as a legal entity and is owned by stockholders. *Advantages #Limited liability: Stockholders are not held liable for the company's debts beyond their initial investment into the company. #It is easy to transfer ownership of the company through buying or selling stocks. This also makes it far easier for the company to raise funds. #It is easier to find people with skills that will benefit the company because corporations generally have more chances for advancement than sole proprietorships or partnerships. *Disadvantages #Corporations are taxed more heavily than other companies. #Publically traded corporations always have the risk of being bought out by their competitors, especially if they are smaller companies. Internal users: individuals who use a company's accounting information from within the company. They include marketing managers, production suptervisors, and company officers. External users: individuals who use a company's accounting information from outside of the company. They include investors, creditors, and the IRS. Key terms: Assets: Resources owned by a business. Example are cash, equipment, and money owed to the company. Liabilities: A company's debts and obligations. Examples are money owed by the company, company services that have been paid for but not yet provided, and bank loans. Common stock: The total amount of money paid by the stockholders for the shares that they purchased. Dividends: A portion of a company's profits that are paid to the shareholders based on the number of shares that they own. The frequency of dividend payments vary from company to company. Revenue: Money earned by the company through selling of goods or services. Expenses: Money spent by the company to purchase goods or services Examples of Assets: Cash: Money that is not currently being used by the company Accounts receivable: Money that has been earned, but not received Notes receivable: Money owed with payment agreed to be made at a later time, usually with interest Property, plant, and equipment: Objects such as land, buildings, and vehicles used by the company Examples of Liabilities: Accounts payable: Money owed, but not yet paid Notes payable: Money owed with payment agreed to be made at a later time, usually with interest Unearned revenue: Money that has been paid to the company, but the goods or services have not yet been provided Salaries payable: Salaries owed to employees that have not yet been paid Examples of Revenues: Sales revenue: '''Revenue earned from the sale of goods '''Service revenue: Revenue earned from providing services Interest revenue: Revenue earned from collecting interest Examples of Expenses: Cost of Goods Sold: The cost purchasing or producing inventory that has been sold (i.e. the cost of ingredients for a cake sold in a bakery) Marketing expensed: Includes the cost of advertising Income taxes: Usually a percentage of a company's income after all other expenses Financial Statements There are 4 main types of financial statements used in financial accounting: Balance Sheet: provides a statement of all of the asses, liabilities, and owner's equity for a single point of time. Income Statement: '''provides a record of revenues and expenses for a period of time (month, quarter, year, etc). '''Retained Earnings Statement: '''records the amount of revenue remaining after expense and dividends have been paid, for a period of time. '''Statement of Cash Flows: records how the company obtained cast, and how that cash was used, for a period of time. Balance Sheet Example ABC Corporation Balance Sheet December 31, 2010 Assets Liabilities and Stockholders' Equity The purpose of a balance sheet is to show the balance between assets and liabilities: for every dollar in assets (owned by the company), there is a corresponding dollar in either liabilities (owed by the company) or Stockholder's Equity (owned by the stockholders). This gives the equation, Assets = Liabilities + Stockholders' Equity. At any point in time, one should be able to enter these amounts and arrive at a balance.